Warning: The Man Who Predicted the 2008 Subprime Crisis Bets 534 Million on a Tesla Collapse
Will Michael Burry be right again?
First of all, I must confess that I am one of those who have been explaining for several months that the stock market is in the middle of a huge Tech bubble that will burst sooner or later. If you read my articles, you must have already noticed that I have been maintaining this position for a year now.
I still haven't changed my opinion on this subject.
The arrival of high inflation in the U.S. and the rise in 10-year Treasury bond rates continue to reinforce my position. The current bubble in the U.S. stock market cannot last forever.
We are inexorably approaching its explosion.
Tesla's excellent 2020 does not justify its current valuation
Tesla, the electric car company founded by Elon Musk, is the best symbol of this Tech bubble. Between January 2020 and January 2021, the company's market cap increased tenfold without Tesla's results justifying such an increase.
Of course, Tesla had a great year in 2020, but this must be put into perspective by several points as I had previously explained in February 2021 in an article with a provocative title: "Not Worried About the Tesla Bubble? You Should, Because It's About To Burst".
Tesla's results were boosted in 2020 by its arrival in China and some aggressive business practices at the end of the year. The goal was to absolutely exceed the 500,000 car sales threshold in one year. That was accomplished, but the new goals set by Elon Musk at the beginning of 2021 are beyond comprehension.
Elon Musk explained that he was counting on a 50% annual sales growth for Tesla. If this pace is maintained, Tesla will sell 10 million cars per year in 2030.
Elon Musk's outsized goals prompt Michael Burry to take a $534 million short position in Tesla
Faced with this mathematical reality, Elon Musk could not find anything better than to outbid him by saying that Tesla would produce at least 20 million cars per year well before 2030. Such a prognosis clearly puts Tesla's future on the stock market at risk at a time when competition in the world of electric cars will become increasingly fierce.
The opinion I've had for months is starting to spread little by little.
When his hedge fund Scion Asset Management published its results for the first quarter of 2021, Michael Burry had to reveal to the SEC a short position on Tesla involving 810,000 shares, or the equivalent of about $534 million. A very important bet and risk on the fall of the price of the company of Elon Musk.
The name Michael Burry may not ring a bell, but he became famous in 2008 during the subprime crisis. He was one of the few investors to foresee this crisis and to take massive advantage of it with his hedge fund at the time.
His winning prediction earned him $100 million personally at the time and $725 million for his hedge fund. As you can see, Michael Burry knows how to hit the mark and is not afraid to take action to take advantage of it.
His story later became world-famous thanks to the movie "The Big Short" released in theaters in 2015. For the record, it was the actor Christian Bale who played his role in the movie.
Michael Burry's short position on Tesla is perilous
For those who are not sure what a short position is, it is a situation where an investor will rent shares of a company to sell them immediately. After a certain period of time agreed upon beforehand with the renter, the investor buys back the borrowed number and returns them to him.
The interest for the investor is to sell today and to buy later. If in the meantime the prices have fallen, he earns the difference. On the other hand, in the opposite case, the loss can be abysmal.
To ensure that the bettor can repay the rental, he must deposit the difference between the starting price and the current price with a clearing house as soon as the share price increases. If the increase becomes too great, the situation can quickly become untenable.
The bet taken by Michael Burry may therefore seem perilous to some, as Tesla's share price has been so high in recent months.
The arguments put forward by Michael Burry are solid
However, Michael Burry puts forward solid arguments to justify his bet at $534 million. If Tesla's market cap exploded during 2020, to the point of surpassing the combined market cap of all the world's largest automakers, it's mainly because Tesla recorded the first annual profits in its history.
This was made possible by the increase in sales of Elon Musk's company, but also by the sale of carbon credits to other manufacturers.
These purchases of carbon credits allow manufacturers of vehicles that pollute more than the authorized limit not to have to pay a fine. On the other hand, virtuous manufacturers can resell their surplus. This is the case of Tesla, which only makes electric cars.
Thus, for each vehicle sold, Tesla earns credits that it does not hesitate to resell to other car manufacturers.
Tesla will lose a huge amount of money from 2021 due to the drop in carbon credit sales
But Michael Burry cleverly points out that fewer and fewer other carmakers need the carbon credits that Tesla earns so much from.
Many automakers are planning to meet their carbon dioxide emission targets during 2021 without the need for environmental credits sold by Tesla.
Without the sale of these carbon credits, Tesla's annual financial statements will be seriously underperforming. In 2020, revenues from carbon credits reached 1.58 billion dollars, double the net profit of 721 million dollars.
Michael Burry is therefore betting that Tesla's economic situation could quickly turn negative again, which would then turn investors away from the stock and make it plunge.
Final Thoughts
A sharp drop in Tesla's share price could be the spark that will trigger the bursting of the Tech bubble in which the stock market is still located. Indeed, seeing Tesla's share price plunge would trigger a sense of panic among many retail investors who would be looking to make massive profits on Tech stocks that have been overbought for months now.
We'll see what the future holds, but I wouldn't be surprised if Michael Burry was once again right on target with this $534 million bet.
Some reading
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